2. Land Bank vs. Monets Export and Manufacturing Corp.

A letter of credit is a financial device developed by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and a buyer, who wants to have control of
the goods before paying.

To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in
favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the
seller to draw drafts and engage to pay them upon their presentment simultaneously with the
tender of documents required by the letter of credit.

Once the credit is established, the seller ships the goods to the buyer and in the process secures
the required shipping documents or documents of title.

To get paid, the seller executes a draft and presents it together with the required documents to
the issuing bank.

The issuing bank redeems the draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires.

The bank then obtains possession of the documents upon paying the seller.

When is the transaction completed: when the buyer reimburses the issuing bank and acquires
the documents entitling him to the goods.

When does the seller get paid: only if he delivers the documents of title over the goods

When does the buyer acquire documents and control of goods: only after reimbursing the bank

Independence Principle:
- What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and the required shipping
documents are presented to it.
- In turn, this arrangement assures the seller of prompt payment, independent of any breach
of the main sales contract.
- The bank determines compliance with the letter of credit only by examining the shipping
documents presented; it is precluded from determining whether the main contract is actually
accomplished or not.
- assures the seller or the beneficiary of prompt payment independent of any breach of the
main contract and precludes the issuing bank from determining whether the main contract
is actually accomplished or not.

LoC as a separate contract: Article 3 of the Uniform Customs and Practice (UCP) for
Documentary Credits provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned with
or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in
the credit.
Non-responsibility of banks: Article 15 of UCP states: Banks assume no liability or responsibility
for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or
for the general and/or particular conditions stipulated in the documents or superimposed
thereon; nor do they assume any liability or responsibility for the description, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or
for the good faith or acts and/or omissions, solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other person whomsoever.

When is the LoC drawable: only after the settlement of any dispute on the main contract
entered into by the applicant of the said letter of credit and the beneficiary, then there would
be no practical and beneficial use for letters of credit in commercial transactions.